I love the Chicago School. Paying Melpomene’s Price will be set to Chicago Manual of Style guidelines. That means footnotes. No MLA or APA style parentheses or endnotes, which are all the rage today. Damn the trend. Footnotes are beautiful: no need to flip to the back of the book (and lose the page); no parentheses sitting in the text like stumbling blocks for eyes to trip over.

My investments are modelled after the efficient market hypothesis, a financial theory fathered by Eugene Fama at the University of Chicago. The efficient market hypothesis states that the price at which an asset or a stock trades in the open market is its price. Stocks are neither undervalued nor overvalued: all the information out there is reflected in the price of the stock. Isn’t that the most beautiful idea?

Finally, believe it or not, the risk theatre is inspired by Chicago School economics theories: Frank Knight’s Risk, Uncertainty and Profit and James Buchanan’s Cost and Choice. The gist of what they say is that there is an opportunity cost to choice. That’s not far from what happens in tragedy: make a choice and pay the price. The Chicago School appeals to my sensibilities: there is no free lunch. Life is nasty, brutal, and short. It’s dog eat dog. This is no Disneyland we’re in.

At Disneyland, the oppressed mice run free (Tom and Jerry, Mickey Mouse), society is egalitarian (Cinderella), and the natural order of the world punishes evil (Evil Queen in Snow White, Captain Hook). But notice: to keep the magic inside Disneyland, it is necessary to build a big gate around it complete with toll booth. It’s a fantasy world. To work its magic, it must sequester itself from the real world. Some people say Keynes is the opposite of the Chicago School. I say Disneyland is the opposite of the Chicago School, not Keynes. But in my imagination, Keynes is somewhere inside the gated world, cavorting with Snow White and the Seven Dwarfs.

Now Chicago is about as far away as you can get from Los Angeles in the States. I would laugh out loud if someone were to try to build a Disneyland in Chicago: it just wouldn’t work. Even compare their sports teams. In the 80s, the LA Lakers–the ‘Showtime’ Lakers–dominated basketball by fast breaking their way to effortless championships. They were even led by a guy called Magic who would dazzle opponents with impossible sleights of hand. In the 90s, the Chicago Bulls dominated basketball by grinding it out with the Bad Boys from the Detroit Pistons (remember Bill Laimbeer?). They were led by His Airness, Michael Jordan. Hierarchy, organization, and sacrifice: this is what gets things done in Chicagoland. Showtime was replaced by sacrifice (remember Jordan getting snubbed by teammates during the 1985 All Star game?). Dues had to be paid. The Windy City is a very different place than Disneyland: they represent competing worldviews. People who believe in an unlimited supply subscribe to the Mickey Mouse worldview. People who see many people competing for limited resources subscribe to the Chicago School.

But enough about Disneyland. Frank Knight’s most famous student was Milton Friedman. This post is the beginning of a series devoted to Friedman’s most influential work: Capitalism and Freedom. This first post covers the 2002 preface, the 1982 preface, and the original 1962 introduction.

Before beginning, here’s an interesting twist of fate. When applying to grad schools back in the spring of 2003, the University of Chicago was one of the places which rejected my application. The rejection letter was beautiful. There were many students competing for limited enrolments. I lost to a better student. I’m fine with that: it reflects the natural order of the world.

Friedman: Capitalism and Freedom Back Blurb

How can we benefit from the promise of government while avoiding the threat it poses to individual freedom? In this classic book, Milton Friedman provides the definitive statement of his immensely influential economic philosophy–one in which competitive capitalism serves as both a device for achieving economic freedom and a necessary condition for political freedom. The result is an accessible text that has sold well over half a million copies in English, has been translated into eighteen languages, and shows every sign of becoming more influential as time goes on.

Friedman Author Blurb

Milton Friedman (1912-2006) was a senior research fellow at the Hoover Institution, Stanford University, and the Paul Snowden Distinguished Service Professor Emeritus of Economics at the University of Chicago. In 1976 he was awarded the Nobel Prize in economics. He has written a number of books, including two with his wife, Rose D. Friedman–the bestselling Free to Choose and Two Lucky People: Memoirs, the latter published by the University of Chicago Press.

Friedman 2002 Preface

Forty years after Capitalism and Freedom came out, Friedman added a three page ‘2002 Preface’. He takes the government spending as a proportion of national income (GDP) as a barometer of freedom. His thesis is that the more government spends, the more it takes away people’s freedom (by spending, government makes choices for the people). In 1956, government spending was 26% of GDP (non-defence = 12%, defence = 14%). In 1982, government spending rose to 39% of GDP (non-defence = 31%, defence = 8%). In 2000, government spending dropped to 36% of GDP (non-defence = 30%, defence = 6%). This is all for the US, of course.

It would be interesting to see how much government spends today. According to the IMF’s website, in 2014, government spending (in the US) accounted for 40% of the GDP (non-defence = 35%, defence = 5%). Government spending in Canada in 2014 was not far off: 41% of GDP (non-defence 40%, defence = 1%).

The trend in the last 50 years has been for government spending to go up. The effect would have been even more pronounced had military budgets remained constant. As it is, military budgets have fallen in both Canada and the US from 14% to 5% (US) and from 8% to less than 1% (Canada).

As a proportion of GDP, the welfare state has grown in the last 50 years. In the US, from 1956 – 2014, it has almost tripled (excluding military, from 12% to 35%).

It should be interesting to see what happens in the US and Canada. The welfare state accounts for 39% (US) and 40% (Canada) of national income already. People want more. But what will happen to people’s freedoms when the welfare state keeps going up?

Friedman 1982 Preface

In 1982 Capitalism and Freedom had been out 20 years and Friedman takes a look back. He notes when the book first came out, nobody reviewed it at all. With some satisfaction, he goes on to say it’s sold 400,000 copies, getting recognition, and also influenced Alex P. Keaton from the TV show Family Ties. No, he actually did not say the last part. But he did say that he finds himself vindicated by problems in Russian and China. In the 80s it was becoming clearer that Russian and China were going into the gutter. Remember, in the 60s and the 70s, it was not so clear cut who would prevail: US or Russia, West Germany or East Germany, South Korea or North Korea, and so on.

The tide was changing: the Fabian socialism of Great Britain (which also exercised a hold on the American intelligentsia) was also on the way out. The 80s were the decade of free trade, laissez-faire economics, capitalism, and freedom. After 20 years of obscurity and ridicule, Friedman’s time had come: he had powerful champions in Reagan and Thatcher.

Friedman Original (1962) Preface

Some interesting notes about his influences. Friedrich Hayek and Frank Knight of course. Friedman also mentions he has drawn from some previously published material in various books and journals promoting ‘individuality’. Yes, of course, it had never really occurred to me, but capitalism and freedom must be the symptoms of an intense awareness of individuality, of being different than others, of having different end goals. It has as its antithesis the collective where everyone is working not for oneself, but for everyone else.

If Friedman’s ideas are to be attached, it must be here: his unrelenting pursuit of individuality at the cost of the collective. To pursue individuality to the extreme leads nowhere: no man is an island. It’s interesting to note that in the 60s and onwards, music shifted from communal, traditional, and folk forms to rock and pop, which are distillations of the individual. Individual genius (Hendrix) or individual suffering (‘King of Pain’ by the Police). Individualism is good, but taken too far becomes egocentricity. Take Sting singing: ‘There’s a flag-pole rag and the wind won’t stop: that’s my soul up there’. Cry me a river.

Friedman Original (1962) Introduction

Friedman defines his standpoint and objectives:

As it developed in the late eighteenth and early nineteenth centuries, the intellectual movement that went under the name of liberalism emphasized freedom as the ultimate goal and the individual as the ultimate entity in the society. It supported laissez faire at home as a means of reducing the role of the state in economic affairs and thereby enlarging the role of the individual; it supported free trade abroad as a means of linking the nations of the world together peacefully and democratically. In political matters, it supported the development of representative government and of parliamentary institutions, reduction in the arbitrary power of the state, and protection of the civil freedoms of individuals.

Flash forward to 2015. How does it look for Friedman? Is the individual still the ultimate entity? Yes, it appears so. As the middle class emerges in Asia and Africa, the individual will become even more pronounced. Is freedom still the ultimate goal? Sometimes. Sometimes when a democracy is installed the people vote democratically for a party that limits individual freedom (e.g. people vote for fundamentalist regimes). What happens there?–the people have used their freedom to take away their freedom. Has free trade been successful? Yes and no. It has made the world a more competitive. Competition has led to innovation which has kept costs low (look at agriculture and computers, for instance). But, free trade has created supranational bodies such as WTO and NAFTA which limit the freedom of the individual. Look at Greece. I don’t think they’re a sovereign nation anymore. Does the reduction in the arbitrary power of the state lead to increased protection of civil freedoms? The jury’s still out on this one. In the 1960s, populations were more homogenous. It’s more of a melting pot now with different classes of people wanting different things. Look at Vancouver. They call in Hongcouver. In Richmond, Asians now outnumber white Christians. There’s been a lot of non-European immigration in Canada since the 60s. The state seems to be assuming greater powers now in order to protect civil freedoms. There’s a election coming up in Canada in the next few days. Hot topics include whether or not federal employees should be allowed to wear a niquab and whether citizenship can be revoked for terror suspects. On a municipal level, the big question in Vancouver and Richmond is whether Asian businesses with Asian signage are legally obliged to post in English as well. The very definition of civil freedom is changing.

Until next time, I’m Edwin Wong and it’s thanks to the Chicago School that the inspiration came to Do Melpomene’s Work.